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Can I Use a Home Equity Loan (HELOC) to Buy a Car?

Yes, you can use a home equity loan (HELOC) to buy a car. As with everything in life, there are pros and cons to doing so.

The Cons

  • We will start with the downside because I am a bad news first kinda guy. A HELOC is a variable interest loan. A standard car loan is a fixed rate, simple interest loan. By using a HELOC, you open yourself to the very real possibility that your interest rate may go up on a monthly basis.
  • Downer number two is that the HELOC may well outlast your car. In order to avoid that, you will have to make a double payment on the HELOC nearly every month. If you do not, you may well have payments remaining on the HELOC and find yourself with a loan for your next car as well.
  • Lastly, adding a HELOC decreases the amount of equity you have in your home by the amount borrowed. If the housing market in your area shifts (imagine that), you may find yourself underwater on your home. It is no good being upside down on your car, but having negative equity in your home is even worse.

The Pros

  • Number one on the list is the chance to have a lower monthly payment. Car loans have a standard repayment period of between three and seven years. A HELOC typically has a ten to fifteen year payment plan. With the loan repayment period stretched out in this fashion, the payments decrease substantially, and you do have the option to pay off the HELOC at any time.
  • Next on the list is that you can make interest-only payments on the HELOC if you run into financially tough times. This should only be done in real crisis situations, however, and should not become a habit.
  • Lastly, the interest paid on a HELOC can be tax deductible, whereas the interest on a car loan never is. But keep in mind that you can only deduct the interest if you itemize. It may be best to consult your accountant or tax-preparer to learn about the benefits and implications of utilizing a home equity loan in this way.

Well, there you have the pros and cons of using a HELOC to buy a car. You can weigh them for yourself, but, in my opinion, it is never a good idea to tap your home equity to purchase a depreciating asset such as a vehicle.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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